Types of Contracts

Types of Contracts

In connection with contracts, there are four types of classifications. Types of contracts in contract law are as follows;

1.                   On the basis of Formation,

2.                  On the basis of Nature of Consideration,

3.                  On the basis of Execution and

4.                  On the basis of Validity.

Types of Contracts on the basis of Formation

On this base Contracts can be classified into three groups, namely Express, Implied, Quasi Contracts.

Express Contracts: The Contracts where there is expression or conversation are called Express Contracts. For example: A has offered to sell his house and B has given acceptance. It is Express Contract.

Implied Contract: The Contracts where there is no expression are called implied contracts. Sitting in a Bus can be taken as example to implied contract between passenger and owner of the bus.

Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so, Actually there will be no Contractual relations between the partners. Such a Contract which is created by Virtue of law is called Quasi Contract. Sections 68 to 72 of Contract Act read about the situations where court can create Quasi Contract.

·                     Sec. 68: When necessaries are supplied

·                     Sec. 69: When expenses of one person are paid by another person.

·                     Sec. 70: When one party is benefited by the activity of another party.

·                     Sec. 71: In case of finder of lost tools.

·                     Sec. 72: When payment is made by mistake or goods are delivered by mistake.

Example: A case on this occasion is Chowal Vs Cooper. In this case A`s husband becomes no more. She is very poor and therefore not capable of meeting even cost of cremation. B, one of her relatives, understand`s her position and spends his own money for cremation. It is done so without A`s request. Afterwards B claims his amount from A where A refuses to pay. Here court applies Sec. 68 and creates a Quasi Contract between them.

Types of Contracts on the basis of Nature of Consideration

On this base, Contracts are of two types. Namely Bilateral Contracts and Unilateral Contracts.

Bilateral Contracts: If considerations in both directions are to be moved after the contract, it is called Bilateral Contract.

Example: A Contract has got formed between X and Y on 1st Jan, According to which X has to deliver goods to Y on 3rd Jan and Y has to pay amount on 3rd Jan. It is bilateral contract.

Unilateral Contract: If considerations is to be moved in one direction only after the Contract, it is called Unilateral Contract.

Example: A has lost his purse and B is its finder. There after B searches for A and hands it over to A. Then A offers to pay Rs. 1000/- to B to which B gives his acceptance. Here, after the Contract consideration moves from A to B only. It is Unilateral Contract.

Types of Contracts on the basis of Execution

On this base Contracts can be classified into two groups. namely, Executed and Executory Contracts. If performance is completed, it is called executed contract. In case where contractual obligations are to be performed in future, it is called executor contract.

Types of Contracts On the basis of Validity

On this base Contracts can be classified into 5 groups. namely Valid, Void, Voidable, Illegal and Unenforceable Contracts.

Valid: The Contracts which are enforceable in a court of law are called Valid Contracts. To attain Validity the Contract should have certain features like consensus ad idem, Certainty, free consent, two directional consideration, fulfillment of legal formalities, legal obligations, lawful object, capacity of parties, possibility of performance, etc.

Example: there is a Contract between X and Y and let us assume that their contract has all those above said features. It is Valid Contract.

Void: A Contract which is not enforceable in a court of law is called Void Contract. If a Contract is deficient in any one or more of the above features (Except free consent and legal formalities). It is called Void Contract.

Example: there is a Contract between X and Y where Y is a minor who has no capacity to contract. It is Void Contract.

Voidable: A Contract which is deficient in only free consent, is called Voidable Contract. That means it is a Contract which is made under certain pressure either physical or mental. At the option of suffering party, a voidable contract may become either Valid or Void in future. For example: there is a Contract between A and B where B has forcibly made A involved in the Contract. It is voidable at the option of A.

Illegal: If the contract has unlawful object it is called Illegal Contract.

Example: There is a contract between X and Z according to which Z has to murder Y for a consideration of Rs. 10000/- from X. It is illegal contract.

Unenforceable: A contract which has not properly fulfilled legal formalities is called unenforceable contract. That means unenforceable contract suffers from some technical defect like insufficient stamp etc. After rectification of that technical defect, it becomes enforceable or valid contract.

Example: A and B have drafted their agreement on Rs. 10/- stamp where it is to be written actually on Rs. 100/- stamp. It is unenforceable contract.

Void Contracts and Illegal Contracts

All illegal Contracts are void, but all void contracts are not illegal: An illegal Contract will not be implemented by court. So, illegal contract is Void. A void contract may not be illegal because its object may be lawful.

The Contracts which are collateral to illegal contract are void, But the contracts which are collateral to Void contract may be Valid: An illegal makes not only itself Void but also the contracts connected to it. But a contract collateral to void contract may attain Validity because object of main contract is lawful.

Void Contracts and Voidable Contracts

Becoming Valid: A Voidable Contract may become Valid at the option of suffering party. But a Void Contract can never and never become Valid.

Third Party Rights: In case of Voidable Contracts third party may attain rights on concerned property, If the third party gets the property before the Voidable Contracts gets declared as Void. But in case of Void Contract third party cannot get any right.

Consideration in Contract No Consideration, No Contract

Consideration in Contract

No Consideration, No Contract

To attain Validity and to create legal relations, the Contract should be with two directional consideration. In the absence of two directional consideration, it can be said that there is no contract at all (only Social agreement). But, the following are situations where Contract attains Validity with one directional consideration.

·                     Affection based Contracts

·                     Promise to pay time bared debt

·                     Charities

·                     Completed Gifts

·                     Extension of Time

·                     Negotiable Instruments

·                     Voluntary Services

·                     Agency Contracts

Affection based Contract: If the contract is an outcome of affection, one directional consideration is sufficient to bring Validity to the Contract.

·                     A case on this point is Raj Lukhy (Vs) Bhoothnadh. In this case A and B are husband and wife respectively. There are frequent clashes and misunderstandings between them. As a result, on one day, a contract has formed between them according to which they have to live separately and for B`s livelihood, A has to Contribute amounts to B. Upon breach of Contract by husband, wife files a suit. Here only one directional consideration can be observed. At the same time it can be confirmed that their Contract is not at outcome of affection. Thus the Contract is held to be Void.

·                     Another case on this point is Venkata Swamy (Vs) Ranga Swamy in this case A and B are brothers. A, as a consequence of affection on B, Promises to discharge B`s debts. In the court it is held that it is a Valid Contract due to presence of affection. Same decision is made in poon bee bee (Vs) Faiz Bhiksh and Bheema (Vs) Shivaram.

Promise to pay time bared debt: Limitation Act has specified durations to perform the Contract. It is called limitation period. In case of pro-note limitation period is three years. After expiry of three years from the date of Pro-note, the debt becomes time bared debt. Where creditor cannot proceed legally to recover the amount. If debtor promises to pay time bared debt, then a new Contract gets formed between Creditor and debtor, where there will be one directional consideration only. i.e. From debtor to Creditor only. But it is Valid Contract.

Charities: In case of Contracts relating to Charities, there will be only one directional Consideration. Such a Contract is at times Valid and at times Void. If the party who has to get the amount of charity, comes across any suffering, then it is Valid Contract. In the absence of loss, the Contract is Void.

·                     A case on this point is Kedarnadh (Vs) Ghorie Mohammad. In the case a Contract gets formed between A and B according to which A has to donate certain amount to B for construction of a town hall. Having trust in A`s promise, B borrows money temporary and commences the construction work. Thereafter A refuses to pay and B sues. As B has come across laws court decides that the contract is Valid and hence, he can recover the amount.

Completed Gifts: Gifts are of two types namely Promised Gifts and Completed Gifts. In case of Promised Gift, The Contract is Void and in case of Completed Gifts the Contract is Valid. If promised gift is not given, the other party cannot proceed legally to get that gift. The person who has handed over the gift, cannot get it back by proceeding legally.

Extension of Time: In case where extension of time to settle the debt is agreed between debtor and creditor, A new contract comes into operation. In such contract there will be only one directional consideration. But it is Valid.

Negotiable Instruments: In case of negotiable instruments, as per the provisions of Negotiable Instruments Act 1881, Consideration will be presumed. So a Contract relating to negotiable instrument attains Validity with one directional consideration.

Voluntary Services: In case where a party renders voluntary service, the contract which gets formed after such service, attains Validity with one directional consideration.

Agency Contracts: In case of Agency Contracts also one directional Consideration is sufficient to bring Validity to the Contract.

Past Consideration is No Consideration

The Consideration which had already being passed before formation of Contract is called Past Consideration.

Indian Law: According to Indian law, Consideration may be past, present or future. So here past consideration is Valid.

England Law: According to England Law, Consideration must be either present or future. Thus in England past Consideration is not Valid.

Exceptions for the statement Past Consideration is No Consideration

The following are situations where past consideration also attains Validity in England.

Service upon request: When a Service is done upon request of the party, such service, though past consideration, attains Validity.

·                     A case on this point is Campleigh (Vs) Breathwait. In this case B is sentenced to death. A is kings relative. B request`s A to Save him from that punishment, by utilizing his (A`s) influence at King. A does so. Thereafter B promises to give certain reward to A to which A gives his acceptance. Here Consideration from A to B is past Consideration. But it is given Validity and the Contract is held to be Valid.

Promise to pay time bared debt: In case of Promise to pay time bared debt the new Contract formed between Creditor and Debtor attains Validity by means of making the past Consideration Valid.

Negotiable Instruments: In case of negotiable instruments also England law gives Validity to past Consideration.

Consideration may move from Promisee or any other Person

England Law: According to England law, consideration should move from promise only. But there is an exception where consideration may move from a person other than promisee. Here condition is – there must be blood relationship between promisee and that other person.

·                     A case on this point is Dutton (Vs) Poole.

Indian Law: According to Indian law, consideration may move from promisee or any other person.

·                     A case is Chinnayya (Vs) Ramayya. In this case A has a daughter namely B and a brother namely C. A makes an offer to B according to which A will transfer certain property to B and B has to pay annuity to C. Thus a Contract gets formed in between them. There after B promises to C to pay annuity. Afterwards B gets failed in paying annuity to C on the ground that she (B) has no Consideration from C. Here Court decides that consideration is obtained by B from A. Thus it is held that B has to pay annuity to C.

Rights of Surety

Rights of Surety

Rights of Surety can be classified into three groups, as follows;

1.                   Rights against Principal debtor.

2.                  Rights against Creditor.

3.                  Rights against Co-Sureties.

Rights against Principal Debtor

·                     Right to give Notice: When ever creditor comes to surety, for the purpose of seeking payment, surety can give a notice to principal debtor to settle the debt.

·                     Rights of Sub-rogation: Sub rogation is a process where rights will get shifted from one person to the other. If surety makes payment to creditor, surety gets all rights of creditor by sub-rogation and from then onwards surety can behave like a creditor.

·                     Right of Indemnity: Principal of indemnity operates between principal debtor and surety where principal debtor becomes implied indemnifier and surety becomes implied indemnity holder. Therefore, surety can make principal debtor answerable for all sufferings.

·                     Right to get Securities: In case where surety makes payment to creditor, surety has right to get the securities given by principal debtor to creditor.

·                     Right to ask for Relief: From the date of guarantee, besides creditor, surety also can bring pressure on principal debtor in connection with settlement of debt.

Rights against Creditor

·                     Right to get Securities: If Surety makes payment to creditor, surety can get all securities into his possession from creditor.

·                     Right to ask for Set-off: Surety can give advice to creditor to sell away the security and to utilize the amount thus realized for set off.

·                     Rights of Sub-rogation: When ever surety makes payment to creditor, creditor foregoes or looses all of his rights in his capacity as creditor and those rights will be attained by surety.

·                     Right to advice to Sue Principal Debtor: Surety has right to give advice to creditor to proceed legally against principal debtor for the purpose of recovering the amount.

·                     Right to insist on Termination of Services: In case where guarantee is with regard to conduct of an employee, surety can insist on termination of services of employee. Here employees status is equal to that of creditor and employee’s status is equal to that of principal debtor.

Rights against Co-Sureties

·                     Right to ask for Contribution: Surety can ask his co-sureties to contribute the amount when principal debtor comes across default. If they have given guarantee for equal amounts, they have to contribute equally. In case where guarantee is given for in equal amounts, the mode of contribution differs from England law to Indian law. As per England law contribution is to be made in the ratio of guarantee amounts. But as per Indian law the deficit amount is to be distributed to all sureties equally and every surety will contribute share of deficit or guarantee amount which ever is less.

·                     Right to claim Share in Securities: When co-Sureties make payment to creditor, they get securities from creditors procession. Then every surety can claim his share in those securities.

Breach of Contract

Breach of Contract

Whenever contract is breached by one of the Party in a contract, the other party comes across some suffering. Therefore, contract act has given certain rights to such suffering party. Those rights are called remedies for breach of contract. Those are given below:

·                     Right to sue for Damages.

·                     Rights to sue for Specific Performance.

·                     Rights to sue for Injunction Order.

·                     Rights to sue for Quantum Meruit.

·                     Rights to sue for Recession of Parties.

·                     Right to sue for Damages

Different types of Damages: Damages in legal terms called Compensation. Whenever one of the party in the Contract comes across breach of Contract, the other party rights to sue for damages.

Rights to sue for Specific Performance: At times the suffering party may file a suit claiming specific performance form the party which has breached the contract. But this type of suit very rarely becomes successful. The following are some circumstances where suit for specific performance will not be taken into consideration.

·                     Example 1: When performance depends upon personal talent and the party has list Such talent.

·                     Example 2: When court thinks that it is just and equitable to arrange for compensation.

Rights to sue for Injunction Order: The order issued by court restrict in a person from doing a particular thing is called injunction order. Upon breach of contract the suffering party may proceed legally for injunction order.

·                     A case on this point is Barner Bros.Vs Nelson. In this case a contract gets formed between A and B according to which B has to conduct his dance programs at A`s theater only for certain period. But B breaches the contract and arranges his programs at other theaters also before expiry of agreed period. A`s sues for injunction order. Then court issues injunction order saying that B should not conduct his programs at other theaters before expiry of agreed period.

Rights to sue for Quantum Meruit: Whenever a party performs the contract partially and then the other party breaches the contract, Suit can be filed claiming proportionate remuneration. It is called suit for quantum meruit.

·                     A case on this point is Flanch Vs Karlbarn. In this case A is editor of a magazine and B is a writer. According to their contract B has to supply story to A`s magazine for certain number of weeks for a particular consideration. B supplies story for some weeks and there after A closes down his magazine. B sue`s for proportionate remuneration and it is allowed by court.

Rights to sue for Recession of Parties: At times the suffering party may sue for recession for contract.

·                     Example: A contract has got formed between A and B on 1st January. According to their contract A has to supply 100 pairs of ready made dresses to B, on 1st April on 28th March strike by transport companies is announced which will be called off on 3rd April. It should be noted that A cannot supply on 1st April. But B is in need of those dresses only on 1st April. Hence B can sue for recession on contract.